On Friday, I wrote about the prospects for a ‘Massive Shift in Volatility’ projected by a potential ‘double doji’ candlestick formation. Although this pattern did not form, subsequent price action provides additional clues as to the likely path for equities forthcoming. Instead of forming a ‘doji’ on Friday, the contract advanced slightly. As indicated earlier, the initial and overwhelming concern for the appearance of a ‘doji’ or any small-body candle is the implication it has for market participant indecision.
Because the trend has been bullish, we are concerned that the doji on Thursday could be a signal for a bearish turn. This ‘turn’ was not confirmed by price action on Friday. Instead, the latest confirmed candle activity was the penetrating line of Wednesday’s trade which discounted the bearish prospects of Tuesday’s fall.
On Monday and Tuesday of last week, E-mini S&P (CME:ESU14) formed a ‘tweezers top’ with consecutive highs at 1959.75 and 1960. A move above this level, given heightened concerns for a negative response to low volatility readings, should be expected to bring about a significant short covering event. While it is difficult to predict how high the S&P’s might trade on the back of short covering and new momentum buying, one might consider the fairly mild y-t-d advance and relative inactivity of the last weeks as adding to bullish prospects.
Finally, we would expect money managers not wanting to get behind the curve early in the new quarter. They should be expected to lower cash levels and participate more heavily in an advance.
A 3% to 5% advance in S&P’s on greater acceptance that economic growth is rebounding following the first quarter, inventory correction led correction, is clearly possible. Any positive geopolitical development could at this point also strike the same response.
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